MedMen Set For Growth – Will Stock Price Follow?

MedMen Enterprises may not have become a household name in the U.S. yet, however, this Culver City, California-based entity has quietly grown to become one of the largest U.S.-based marijuana companies.

Still, amid expansion and buyouts, the company continues to bleed cash. Such losses have taken a toll on MedMen’s stock, and the equity trades at low prices on OTC and Canadian markets. While MedMen could still become a force in the U.S. cannabis industry, investors will probably struggle to profit from this growth.

MedMen’s Home Market Larger Than Canada

Without a doubt, American marijuana companies face onerous regulations. Thanks to marijuana’s Schedule I designation, cannabis (except for hemp) remains illegal at the federal level. Though it operates in multiple states, its cannabis products cannot legally cross state boundaries.

However, MedMen has an advantage—it operates in California. Its population of 39.6 million exceeds Canada’s count 37.1 million. In many respects, MedMen’s stock reminds me of many of the Canadian cannabis equities, minus the valuation. Furthermore, with Canopy Growth (NYSE: CGC) agreeing to buy Acreage Holdings (ACRG), the focus has turned to U.S.-based companies.

Some consider MedMen the most recognized cannabis brand in the U.S. It operates 37 retail stores across 12 states with licenses to operate a total of 86 establishments.

MedMen Turns Regulation into an Advantage

Moreover, MedMen ironically benefits from some of the stringent regulations. CEO Adam Bierman also points out that their stock benefits from a competitive moat. Due to strict zoning restrictions surrounding marijuana retailers, competitors will have a harder time getting retail space.

Furthermore, it has become vertically integrated as the company cultivates, manufactures, and distributes its product. This gives MedMen more control than marijuana retailers who outsource these functions.

Stock Dilution Hurts Investment Potential

Investors can buy into MedMen’s growth at just 3.2 times sales, which is preferable to the 50-plus price-to-sales ratio seen in many Canadian cannabis equities.

Still, investors need to remain aware that MedMen is a small-cap stock. It trades in the $2.25 per share range and has seen little movement over the last two months. MedMen’s stock has not sold above $5 per share since soon after Canada legalized marijuana.

Moreover, the analysts covering the stock project losses both this year and next. MedMen bulls can take comfort in the fact that these same analysts predict almost 283% revenue growth this year and close to a 185% increase in 2020. They can also buy this growth at just 3.2 times sales. Some might prefer this to the 50-plus price-to-sales ratio seen in many Canadian cannabis equities.

Still, judging by the 200-plus% market cap growth in a shrinking stock, stock dilution has become a solution. Further, they will pay for the $682 million acquisition of PharmaCann entirely with stock. This seems like a tall order for a firm with a market cap of just over $347 million. Although PharmaCann will likely bolster MedMen’s growth, the method of purchase could easily dilute potential profits away from investors.

The Bottom Line

The growth of MedMen Enterprises may not accrue to its stock. MedMen has expanded in 12 states despite federal regulations that limit the company to statewide markets. However, it helps that its largest state market, California, has a larger population than Canada. The company has also frozen out much of its retail competition thanks to zoning restrictions.

Unfortunately for shareholders, it has funded much of its expansion through stock dilution. This has sapped much of the near-term potential for investor profits. Unless and until MedMen can fund itself through company profits, shareholder profits will likely not follow.

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The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

Will Healy
Will Healy is a freelance business and financial writer based in the Dallas area. In addition to marijuana, energy, and mining stocks, he has also written about real estate, insurance, personal finance, and macroeconomics. In addition to Capital 10X, his articles have appeared on sites such as InvestorPlace, Yahoo! Finance, MSN Money, Kiplinger’s Personal Finance, GOBankingRates, and Seeking Alpha. Will holds a B.S. in Journalism from Texas A&M University, an M.S. in Geography from the University of North Texas, and an MBA from the University of Texas at Dallas. Phone: 416-721-8257. Address: 682 Indian Road Toronto, Ontario M6P 2C9.
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